Vodafone Rejects Activist Shareholder Demands

Published on: 6th Jun 2007

Note -- this news article is more than a year old.

LONDON (Dow Jones) Mobile phone giant Vodafone Group Thursday rejected activist shareholder calls for changes to its capital structure saying that the proposals would undermine the company's ability to achieve value in its USA business and limit its ability to invest in potential new "value creating initiatives."

Activist shareholder group Efficient Capital Structures, led by former Marconi executive John Mayo, wrote to Vodafone late Wednesday urging it to restructure debt and separate its Verizon Wireless joint venture, in the belief that up to GBP38 billion could be returned to shareholders by doing so.

However, the board of the world's largest mobile phone operator by sales rejected the proposal Thursday evening, saying that it believed greater value could be delivered to shareholders by executing on its current strategy.

Vodafone rejected claims that its 45% stake in U.S. mobile phone operator Verizon Wireless wasn't returning enough value, adding that it had delivered superior growth and cash-generation benefits to Vodafone shareholders in recent years.

The Newbury, England-based operator said that it had already considered the idea of a Verizon Wireless tracking share, prior to ECS' suggestion, and deemed that such a share would trade at a material valuation discount below that of the assets fundamental value.

Responding to ECS' request that the mobile giant should issue bonds to shareholders to increase group leverage by GBP34 billion, Vodafone said that such an idea would create significant risk and constrain the company's future flexibility.

"ECS' proposals would lead to Vodafone becoming a sub-investment grade borrower," said Vodafone in a statement. "As such, Vodafone's cost of debt would rise materially, contributing to incremental interest expense of at least GBP2 billion per annum. At this level of leverage, it is unlikely that Vodafone could benefit from tax deductibility on the full interest amount. Vodafone's existing dividend policy would also be put at risk."

Efficient Capital Structures consists of a group of small shareholders owning 210,000 shares, or 0.0004%, of Vodafone's issued stock.

Vodafone Chief Executive Arun Sarin came under increasing shareholder pressure last May when activist investors - including Morley Fund Management - questioned the company's business strategy. However, the majority of shareholders have since regained faith in the management of the company, after Vodafone announced cost-cutting measures in Western Europe and expansion plans into high-growth regions, such as Africa, India and Turkey.

"We are supportive of what Vodafone is doing, both operationally, strategically and financially. The current trend towards increased gearing is concerning as any short-term benefit may be at the cost of long-term shareholder value," Morley fund manager Mervyn Douglas said.

Adam Steiner, head of research at fund management company SVG Capital, described the ECS activism as a "storm in a teacup" and said its calls for a Verizon Wireless tracker stock would affectively hand control of the U.S. mobile operator to Verizon Communications, Vodafone's joint-venture partner.

"The doubt isn't about whether Vodafone is undervalued - it's about whether that extra value can be realized. If they continue to show strong growth in emerging markets, then Vodafone is going to get to the 220 pence target price under its own steam any way," Steiner said.

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